Key Level Check
Last week markets saw a pretty substantial shake to the downside. This week stocks tried to bounce from short-term oversold conditions. The lower timeframes did see the minor swing high taken out at 1930, but we will need to see the major swing high at 1940 broken before a meaningful bounceback can occur.During pullbacks/corrections it is very important to not fall into the emotional trap of negative news flow and fear. How do we avoid such reactions? We bring out our levels again and see just how much damage is done to the uptrend and where we will be proven wrong. We did a similar thing about 6 weeks ago and it helped ease some anxiety. So while geopolitical news is swirling, along with an African outbreak of Ebola, lets just examine the US stock market to see if the world really is ending.
SP500 Daily
As you can see we have a well defined uptrend channel and while this has been a decent pullback, the trading action is still that of an uptrending environment longer term. All that is currently occurring is that price is moving from the upper range to the lower, still making higher highs, still making higher lows, and price is retesting the breakout level at 1,900. We discussed previously how prices above 1,900 put this market squarely into breakout territory.
There is absolutely no reason to panic here and your longer-term winning positions should still be mostly held. Until we see otherwise we need to assume that the trend will persist and that buyers will come in to defend the lower trend support. Support is support until broken. The key level for the uptrend is the 1,870 swing low which also coincides roughly with the lower uptrend support. Thats a big level folks, if that breaks we will need to reevaluate our intermediate term bullish thesis.
SP500 Weekly
Taking a longer term look we still have not even come close to retesting the decade long breakout that occurred in 2013. That support should come in around 1,600 and would likely present a fantastic buying opportunity. That would really be a healthy thing for this market; to correct back to that breakout area would certainly get the "crash" folks out in force (as it remains roughly 300 points lower). You need fear to keep a bull market going and a move like that would invoke some serious fear. Fortunately for us we will have been in a cash position for some time and wouldn't really feel much pain from a move like that.
If we breakdown from current levels this is where we will experience the most pain. Being that we are currently 60% exposed to the market here, I believe most if not all of our current holdings would be stopped out on a break of the 1,870 area. A further correction from there down to 1,600 would be relatively painless and would put us in a position to capitalize significantly once the market turns back to the upside.
Thats how I see things here. Really not too complicated. Either we stay in the trend channel and we look for bullish trade opportunities (like we have for the past few years now), or we break from here, take some profits and await the next setup that would emerge.
Round Trip For TWX
When Time Warner rejected Fox's offer the speculation was that Fox would come back with another higher bid. But last week during their 2nd Quarter earnings call, Fox said it would pull its offer and not pursue further. That sent the stock immediately down 12%. Throughout the week TWX shares continued to decline and came right back to our previous breakout level. That being the case I took the opportunity to add back the shares I had sold and now am holding another full position in TWX. Our stop will move up to just under the breakout level and rising 20 WMA. There is also a small gap due to the breakout seen on the daily chart that could be filled before stopping our positions out. Here's the daily view:
When prices traded back to $72 on Thursday I pulled the trigger and was even able to catch the nice bounce we saw on Friday. We can't know for sure if this level/breakout will hold on this retest, but our risk is well defined in case we are proven wrong. A weekly close below $70.50 will be enough for us to step aside.
We are back in almost exactly the same position we were before the big surge and prices are still in uptrend resumption mode. The only thing that is different is that the market should now be aware that competitors for Time Warner feel their current and future assets are worth upwards of $85 per share. Regardless of the business games going on, this stock has been a strong performer over the past 5 years and price is still making higher highs in the uptrend.
Entering Berkshire Hathaway (BRKB)
When Wall Street asked the Oracle of Omaha, "What have you done for me lately", Warren Buffett responded with his largest quarterly profit ever. You can't really go wrong following along with Warren and his company Berkshire. This setup leaves very little to the imagination; its simplicity is its greatest trait.
What I love about this signal is that the stock is breaking out to new all-time highs while the market may be finding key trend support. That is a sign of leadership and relative strength that shouldn't go ignored.
We want to be long this stock above this breakout area and will use the weekly swing low at $121.70 as our initial stop. This trade looks similar to our HON trade a few weeks ago (hopefully this time is a different result). If this rolls over quickly I want to be alerted right away but also want to give it just a little room to wiggle down to that $121 swing low. We have an obvious trailing stop level in place where we could slide our stop up to should price hold here for a few weeks. The next stop location would move to just below our entry at $125.80.
This is an excellent risk/reward and allows us to ride the coattails of America's most successful investor.
What I love about this signal is that the stock is breaking out to new all-time highs while the market may be finding key trend support. That is a sign of leadership and relative strength that shouldn't go ignored.
We want to be long this stock above this breakout area and will use the weekly swing low at $121.70 as our initial stop. This trade looks similar to our HON trade a few weeks ago (hopefully this time is a different result). If this rolls over quickly I want to be alerted right away but also want to give it just a little room to wiggle down to that $121 swing low. We have an obvious trailing stop level in place where we could slide our stop up to should price hold here for a few weeks. The next stop location would move to just below our entry at $125.80.
This is an excellent risk/reward and allows us to ride the coattails of America's most successful investor.
Rotation Occurring
Back in January it was Momentum that was being sold while Blue Chips rose. Now we are seeing growth rewarded and safety set aside. Interestingly enough this pullback seems most likely that, just a rotational pullback. Names like FB, TSLA, GILD, NFLX are holding at highs and have bucked the recent weakness, while more defensive and extended groups have been sold. Utilities and Industrials have been hit particularly hard, yet Discretionary seems to be gathering itself.
This is not the typical formula for a massive correction. We may see that develop at some point, it just likely isn't now.
Being that we had significant cash reserves heading into this week I was able to put some to work in a couple of our existing holdings that were under capitalized. I took the opportunity to bring WFC and UNH up to proper risk sizing using the recent 7-10% pullbacks in both names. While this is not exactly to the plan, typically I like to buy strength, not weakness, I felt it was a good opportunity to take advantage of the key support areas being tested and maintain our risk per position at a very comfortable level.
When you see leading stocks pullback to retest breakout levels as the market indexes find support, that presents a solid opportunity to buy the dip. I am generally weary of buying more of a falling stock (simply because you have no idea of how much further it will drop), but when you see this confluence of levels coinciding with one another it can be a good risk/reward proposition.
WFC
UNH
Not all pullbacks are created equally. A pullback off of a higher high is significantly stronger and more reliable than one coming off of a lower high. Buying more of a stock coming down from a higher high is a better bet because the uptrend is still intact. If you are seeing a pullback off a lower high it is more likely to lead to another lower high and therefore a lower low, invalidating your position. You can certainly buy dips and still execute a trend following strategy, but those dips need to come from uptrending stocks making higher highs.
Being that we had significant cash reserves heading into this week I was able to put some to work in a couple of our existing holdings that were under capitalized. I took the opportunity to bring WFC and UNH up to proper risk sizing using the recent 7-10% pullbacks in both names. While this is not exactly to the plan, typically I like to buy strength, not weakness, I felt it was a good opportunity to take advantage of the key support areas being tested and maintain our risk per position at a very comfortable level.
When you see leading stocks pullback to retest breakout levels as the market indexes find support, that presents a solid opportunity to buy the dip. I am generally weary of buying more of a falling stock (simply because you have no idea of how much further it will drop), but when you see this confluence of levels coinciding with one another it can be a good risk/reward proposition.
WFC
UNH
Not all pullbacks are created equally. A pullback off of a higher high is significantly stronger and more reliable than one coming off of a lower high. Buying more of a stock coming down from a higher high is a better bet because the uptrend is still intact. If you are seeing a pullback off a lower high it is more likely to lead to another lower high and therefore a lower low, invalidating your position. You can certainly buy dips and still execute a trend following strategy, but those dips need to come from uptrending stocks making higher highs.
Chart of the Week
Tesla (TSLA)
Tesla closed at a new weekly closing high this week and appears setup for more upside to come. It has the look of a strong cup/handle base formation and this week's breakout along with RS confirmation trigger that setup. The initial target for this pattern is $313, or 25% above current prices.
Tesla is one of my top individual holdings for my private accounts and I personally believe this is just getting started. Putting bias aside, the bullish thesis would be invalidated with a weekly break and close below $215. That would break the swing low, 20 WMA and rising uptrend support going back 2 years.
Here we have a stock that is broadly hated by investors (over 25% of the total shares outstanding are shorted), presents a disruptive technology for the future, trades at a very high P/E multiple (expensive valuation), and is currently at new weekly closing highs. That sounds like a recipe for higher prices to me.
Nothing in the stock price suggests that it will be weakening anytime soon, but ask most people and they say this is a bubble stock, the move has already happened, etc. This stock "had gone too far" back in May of 2013 and now prices are over 150% higher! This just goes to show that only price pays and you never can truly know where you are in a trend.
Do understand though that this is a mover and being that it is highly bet against, if something were to go wrong it could move equally quickly to the downside. But if you have a plan in place and manage your risk appropriately, this could be a nice addition to any portfolio.
Tesla is one of my top individual holdings for my private accounts and I personally believe this is just getting started. Putting bias aside, the bullish thesis would be invalidated with a weekly break and close below $215. That would break the swing low, 20 WMA and rising uptrend support going back 2 years.
Here we have a stock that is broadly hated by investors (over 25% of the total shares outstanding are shorted), presents a disruptive technology for the future, trades at a very high P/E multiple (expensive valuation), and is currently at new weekly closing highs. That sounds like a recipe for higher prices to me.
Nothing in the stock price suggests that it will be weakening anytime soon, but ask most people and they say this is a bubble stock, the move has already happened, etc. This stock "had gone too far" back in May of 2013 and now prices are over 150% higher! This just goes to show that only price pays and you never can truly know where you are in a trend.
Do understand though that this is a mover and being that it is highly bet against, if something were to go wrong it could move equally quickly to the downside. But if you have a plan in place and manage your risk appropriately, this could be a nice addition to any portfolio.
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